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As we arrive in the UK at “meaningful vote” day which seems about as likely to be true as a Bank of England “Super Thursday” actually being super the real economic news comes from the heart of the Euro area. So here it is.

According to first calculations of the Federal Statistical Office (Destatis), the price adjusted gross domestic product (GDP) was 1.5% higher in 2018 than in the previous year. The German economy thus grew the ninth year in a row, although growth has lost momentum. In the previous two years, the price adjusted GDP had increased by 2.2% each. A longer-term view shows that German economic growth in 2018 exceeded the average growth rate of the last ten years (+1.2%)……….As the calendar effect in 2018 was weak, the calendar-adjusted GDP growth rate was 1.5%, too ( German statistics office )

A little care if needed as these numbers are not yet seasonally adjusted. But we do have price-adjusted numbers have gone 2.2% (2016) then 2.5% (2017) and now 1.5%. This immediately reminds me of the words of European Central Bank President Mario Draghi at his last press conference.

I’ll be briefer than I would like to be, but certainly especially in some parts of this period of time, QE has been the only driver of this recovery. There are lots of numbers that we can give about how it did change financing conditions in a way that – in many ways. But let’s not forget that interest rates had dramatically declined even before QE but they continued to do so after QE…….. We view this as – but I don’t think I’m the only one to be the crucial driver of the recovery in the eurozone. At the time, by the way, when also other drivers were not really – especially in the first part, there was no other source of growth in the real economy.

This comes to mind because if you take that view and now factor in the reduction in the monthly QE purchases and then their cessation in 2018 then the decline in GDP growth in Germany was sung about by Radiohead.

With no alarms and no surprises
No alarms and no surprises
No alarms and no surprises
Silent, silent

In essence if we switch to the world of football then 2018 was a year of two halves for Germany because if we go back to half-time we were told this.

Compared with a year earlier, the price adjusted GDP rose 2.3% in the second quarter of 2018.

At that point economic growth seemed quite consistent at around 0.5% per quarter if we ignore the 1,1% surge in the first quarter of 2017. So Mario’s point is backed up by German economic growth heading south in the second half of 2018 which if we now look wider poses an implication for another part of his speech.

Euro area real GDP increased by 0.2%, quarter on quarter, in the third quarter of 2018, following growth of 0.4% in the previous two quarters.

We do not have the final result for the second half of 2018 but the range seems set to be between -0.1% and 0.1%. Ironically it means that the quote below from the Italian economy minister is rather wrong.

*TRIA: EU TO FACE POTENTIAL COLLAPSE IF POLICIES FEED DIVERGENCE

As we stand the German economic performance has in fact converged with the Italian one.

Detail

There has been quite a slow down in domestic consumption because at the end of the second quarter we were told this.

Overall, domestic uses increased markedly by 0.9% compared with the first three months of the year.

Whereas now we are told this was the situation six months later.

Both household final consumption expenditure (+1.0%) and government final consumption expenditure (+1.1%) were up on the previous year. However, the growth rates were markedly lower than in the preceding three years.

That is not an exact comparison because investment is not in the latter and it has remained pretty strong but nonetheless there has been quite a fall in domestic consumption. Also investment has not turned out to be the golden weapon against an economic slowing.

German exports continued to increase on an annual average in 2018, though at a slower pace than in the previous years. Price-adjusted exports of goods and services were up 2.4% on 2017. There was a larger increase in imports (+3.4%) over the same period. Arithmetically, the balance of exports and imports had a slight downward effect on the German GDP growth (-0.2 percentage points).

In terms of the world economy that is a good thing as many have argued ( including me) that the German trade surplus is an imbalance if we look at the world economy. The catch is how you fix it and shrinking it in a period of economic weakness is far from ideal. Also another number went against the stereotype.

For the first time in five years, short-term economic growth in industry was lower than in the services sector.

Lastly these are not precise numbers but output per head of productivity growth seems to have slowed to a crawl.

On an annual average in 2018, the economic performance in Germany was achieved by 44.8 million persons in employment whose place of employment was in Germany. According to first calculations, that was an increase of roughly 562,000 on the previous year. This 1.3% increase was mainly due to a rise in employment subject to social insurance.

1.5% is not much more than 1.3%.

Fiscal Policy

This is not getting much attention but you can argue that Germany has made the same mistake in 2017/18 that it made in 2010/11 in Greece albeit on a much smaller scale.

General government achieved a record surplus of 59.2 billion euros in 2018 (2017: 34.0 billion euros). At the end of the year, central, state and local government and social security funds recorded a surplus for the fifth time in a row, according to provisional calculations. Measured as a percentage of the gross domestic product at current prices, this was a 1.7% surplus ratio of general government for 2018.

It has contracted fiscal policy into an economic slow down and thereby added to it.

Comment

As these matters can get very heated on social media let me be clear I take no pleasure in Germany’s economic slow down. For a start it would be illogical as it will be a downward influence on the UK. But it has been a success for the monetary analysis I presented in 2018 as the fall in the money supply was both an accurate and timely indicator of what was about to happen next.

Official policy has seen a dreadful run however. I have dealt with fiscal policy above which has been contracted in a slow down but we also see that the level of monetary stimulus was reduced. Apart from the obvious failure implied by this there are other issues. The most fundamental is a point I have made many times about Euro area economic growth being a “junkie” style culture depending on the next stimulus hit. That has meant it has arrived at the next slow down with the official deposit rate still negative ( -0.4%) as I have long feared. Still I suppose it could be worse as the Riksbank of Sweden managed to raise interest-rates in this environment after not doing so when the economy was doing well.

Let me post a warning to avoid the Financial Times article today about UK Index-Linked Gilts. No doubt this will later be redacted but in the version I read the author was apparently unaware that the RPI inflation measure not CPI is used for them.

Yesterday was another poor day for the Forward Guidance provided by central bankers as we note developments in the US and UK. There was a flurry of media activity around the statement from Bank of England Governor that the Chinese Yuan could challenge the US Dollar as the world’s reserve currency, but really he was saying that it is a very long way away. So let us start with the US Federal Reserve and look back to September for its Forward Guidance. From Reuters.

Fed policymakers did not jack up their expectations for rate hikes in coming years, as some analysts had thought, instead sticking closely to rate hike path forecasts outlined in June that envision short-term rates, now at 2.0 percent to 2.25 percent, to be at 3.1 percent by the end of next year.

This suggested a couple of rate hikes in 2019 and at the beginning of December Bill Conerly stepped up the pace in Forbes Magazine.

My forecast for interest rates remains higher than the Fed’s September 2018 forecast. I expect the Fed Funds rate to end 2019 at 3.9%, and to end 2020 at 4.5%.

Bill seemingly had not got the memo about a slowing word and hence US economy as he reflected views which in my opinion were several months out of date as well as being extreme for even then. But what we were seeing was a reining back of forecasts of interest-rate rises. Putting that in theoretical terms the so-called neutral rate of interest showed all the flexibility of the natural rate of unemployment in that it means whatever the central bankers want it to mean.

Last Night events took another turn with the publication of the US Federal Reserve Minutes from December.

With regard to the post meeting statement, members agreed to modify the phrase “the Committee expects that further gradual increases” to read “the Committee judges that some further gradual increases.” The use of the word “judges” in the revised phrase was intended to better convey the data-dependency of the Committee’s decisions regarding the future stance of policy; the reference to “some” further gradual increases was viewed as helping indicate that, based on current information, the Committee judged that a relatively limited amount of additional tightening likely would be appropriate.

As you can see they have chosen the words “judges” and “some” carefully and the prospect of interest-rate increases this year has gone from a peak of 4 with maybe more in 2020 to perhaps none. Or for fans of Carly Rae Jepson it has gone from ” I really,really,really,really” will increase interest-rates to “Call Me Maybe”

Why? Well some may mull the idea of there being a form of Jerome Powell put option for the stock market.

Against this backdrop, U.S. stock prices were down nearly 8 percent on the period.

Widening that out it also reflected an economic weakening which has mostly got worse since.

Forward Guidance

This is supposed to help the ordinary consumer and business(wo)man but letting them know what the central bank plans to do. But to my mind this is of no use at all if they keep getting it wrong as the US Federal Reserve just has. In fact in terms of fixed-rate mortgages and loans they have been given exactly the wrong advice. Whereas we had reflected the changing outlook as I quote from my opening post for this year.

The problem is their starting point and for that all eyes turn to the central banks who have driven them there. Get ready for the claims that “it could not possibly have been expected” and “Surprise!Surprise!”

I find myself debating this on social media with supporters of central bank policy who mostly but not always are central banking alumni. They manage to simultaneously claim that Forward Guidance is useful but it does not matter if it is wrong, which not even the best contortionist could match.

Bank of England

The memo saying “the times they are a-changing” had not reached Bank of England Governor Mark Carney as he posted on the Future Forum yesterday afternoon.

That’s why the MPC expect that any future increases in Bank Rate are likely to be at a gradual pace and to a limited extent.

He is still hammering away with his hints at higher interest-rates although he was also trying to claim that movements in interest-rates are nothing to do with him at all.

So in other words, low policy interest rates are not the caprice of central bankers, but rather the consequence of powerful global forces.

Makes you wonder why he and his 8 interest-rate setting colleagues are paid some much if the main events are nothing to do with them doesn’t it? I somehow doubt that when a Bank of England footman handed a copy of Mark Carney’s Gilt-Edged CV to the World Bank that it was claiming that.

Governor Carney was in typical form in other ways too as he answered this question.

In your opinion, how likely is a large spike in Inflation in the near future?

For example in a lengthy answer he used the word inflation once but the word unemployment five times and did not mention inflation prospects/trends ( the question) at all! Better still the things which were apparently “the consequence of powerful global forces.” suddenly became due to his ilk.

Simulations using the Bank’s main forecasting model suggest that the Bank’s monetary policy measures raised the level of GDP by around 8% relative to trend and lowered unemployment by 4 percentage points at their peak. Without this action, real wages would have been 8% lower, or around £2,000 per worker per year, and 1.5 million more people would have been out of work.

As we note his slapping of his own back whilst blowing his own trumpet I zeroed in on the wage growth claim which appeared in another form much later.

Although it’s true that QE helped support asset prices, it also boosted job creation and wage growth.

There is a lot in that sentence but let us start with the wage growth issue. The reality is that real wage growth has been negative in the UK and worse than our economic peers. By propping up zombie banks and companies for example there are reasons to argue that the QE era has made things worse. But apparently in a stroke of magic it has made everything better! Now whilst correlation does not prove causation it is hard to argue you have made things better in a period where you have had a major impact and things have got worse. Indeed the more recent trend as the QE flow has slowed has been for wages to pick up.

Also there was the “helped support asset prices” point. This is welcome in its honesty but there have been times that the Bank of England ( in spite of its own research on the subject) has tried to deny this.

What about debt?

Back in 2016 Governor Carney told us.

This is not a debt-fuelled recovery.

Yesterday he changed his tune slightly.

Recent growth in aggregate credit in the UK has been modest, growing a little faster than nominal GDP.

Notice the shift from real GDP to the invariably higher nominal GDP. Missing in action was any mention of unsecured credit which surged into double-digit annual growth in response to the Sledgehammer QE action of the Bank of England in the autumn of 2016 and is still growing at over 7%. Nor did the surge in student loans merit a mention unlike in this from Geoff Tily of the TUC last week.

Total unsecured debt has risen to £428 billion. At 30.4 per cent of household income, this is higher than before the financial crisis:

Comment

There is a fair bit to sweep up here but the main point is that we have developed bodies called independent that do the establishments bidding on a scale politicians themselves would never have got away with. Can you imagine politicians being able to buy trillions of their own debt?! Next we are told that they can help us with the future via Forward Guidance but that when it goes wrong it does not matter. The elastic of credibility just snapped.

In my own country the UK this was added to on LBC Radio where we were grandly told yesterday that someone who used to set UK interest-rates would be on air. When Ian McCafferty came on he seemed confused by the statement that the UK economy grew by 0.6% in the third quarter and sounded out of touch with events. For example in the early part of 2018 it was true that Germany and France were growing more quickly than the UK but as this morning has reminded us to say they are doing so now makes you look out of touch at best.

In November 2018, output slipped back sharply in the manufacturing industry (−1.4% after +1.4% in October) as well as in the whole industry (−1.3% after +1.3%). ( France-Insee ).

Perhaps he will offer a retraction like he had to do when he was on LBC last August. Meanwhile you know I often tell you never to believe anything until it is officially denied don’t you? From Governor Carney yesterday.

We have also made clear that we wouldn’t set negative interest rates – the Bank’s Monetary Policy Committee, which is responsible for setting Bank Rate, has said that the effective lower bound on Bank Rate is close to, but a little above, zero.

As a hint the lower bound was 0.5% until they cut to 0.25% ( and promised a cut to 0.1% in another Forward Guidance failure).

This morning has brought news of an event that had been promised so many times but turned out to be a false dawn. Indeed on their way to apparently making sense of this world Rosa & Roubini Associates told us this.

Riksbank Likely to Wait Longer Before Lift-Off

I guess you are now all expecting this.

Economic activity is strong and the conditions are good for inflation to remain close to the inflation target in the period ahead. As inflation and inflation expectations have become established at around 2 per cent, the need for a highly expansionary monetary policy has decreased slightly. The Executive Board has therefore decided to raise the repo rate from −0.50 per cent to −0.25 per cent.

Actually there is quite a bit that is odd about this as indeed there has been, in my opinion, about the monetary policy of the world’s oldest central bank for some time. Let me give you two clear reasons to be doubtful. Firstly GDP growth plummeted from the 1% of the second quarter of this year to -0.2% in the third. Or as the Riksbank puts it.

As expected, Swedish GDP growth has slowed down during
the second half of this year. However, the downturn in the third quarter was greater than expected.

So if we step back we immediately wonder why you raise rates when economic growth is slowing when you could have done so when it was rising? The excuse provided looks weak especially as we note the automobile industry has continued to struggle.

One contributory cause of this was that household consumption fell by a surprisingly large degree, but this can partly be explained by temporarily weak car sales.

Also inconvenient numbers are regularly described as temporary even when they are nothing of the sort.

Moving onto inflation the outlook has also changed as we have moved towards the end of 2018.

The inflation rate according to the CPI with a fixed interest rate (CPIF) was 2.1 percent in November 2018 (2.4 percent in October). The CPIF decreased by 0.1 percent from October to November. ( Sweden Statistics)

Here is FXStreet from last week when these numbers came out.

Nordea Markets 1/2: #Sweden: CPIF inflation stood at 2.1% in November, below consensus and 0.3% point below the #Riksbank’s forecast. Core inflation, i.e. CPIF ex energy, came out at 1.4%, as much as 0.3% point below the Riksbank’s call.

To be fair to Nordea they were expecting a hike so perhaps they had received an official nod because there is now another factor at play. That is of course the lower trajectory of the oil price which looks set to depress headline inflation numbers in the weeks and months ahead. If we take a broad sweep the price of a barrel of Brent Crude Oil has fallen some US $30 since the Riksbank balked at raising Swedish interest-rates. I think you can spot the problem here. Apparently the wages fairy will turn up which of course is yet another central banking standard view in spite of reality not being that helpful.

Wage growth has certainly become a little lower than
the Riksbank’s forecast over recent months and the forecast has been revised downwards slightly.

The Riksbank’s own view

Let me know switch to some sections of their monetary report which frankly would fit better with an interest-rate cut.

The global economy, which has grown rapidly in recent years, is now entering a phase of more subdued GDP growth, which is in line with the Riksbank’s earlier forecasts.

So Sweden is swimming against the trend?

Economic activity in Sweden is still strong, although GDP growth and inflation have been weaker than expected.

So definitely maybe. What about inflation prospects?

Even though inflation has been lower than expected, the conditions remain good for inflation to stay close to the inflation target going forward.

Then we get quite a swerve because you might think that with the claimed view of the Riksbank more interest-rate hikes will be on the way. It would be logical assuming there is anyone who believes the growth path remains strong and inflation will be ~2% per annum. But apparently not.

The forecast for the repo rate has therefore been revised downwards to indicate that the next repo rate rise will probably occur during the second half of 2019 . After this, the forecast indicates approximately two rate rises per year by 0.25 percentage points each time.

If we skip the last sentence on the grounds that this has been not far off the promised pattern since the Riksbank last raised back in 2011 we see that what is now called a “dovish hike” has just taken place. What that means is that whilst there has been a rise the future expected path falls. Thus if you follow central banking forward guidance interest-rates as 2019 develops may now be lower than you were expecting.

Operation Twist and QE

The other factors in Sweden’s monetary policy are described below.

At the end of November, the Riksbank’s government bond
holdings amounted to just under SEK 350 billion, expressed as a nominal amount.

But they are giving Operation Twist an extra squeeze.

In December 2017, the Executive Board also decided that reinvestments of the large principal payments due in the first six months of 2019 should be allocated evenly across the period from January 2018 to June 2019 . This means that the Riksbank’s holdings of government bonds will increase temporarily in 2018 and the beginning of 2019.

If you wished to tighten monetary policy then you could simply let these bonds mature and not replace them.

US Federal Reserve

As we were expecting it did this last night.

Today, we raised our target range for short-term interest
rates by another quarter of a percentage point. ( Chair Powell)

Not everyone was on board however as there was a nearly 800 point swing in the Dow Jones Industrial Average in response to it. This also meant it ignored the advice from President Trump not to do so and to cut the amount of Quantitative Tightening. The issue was summed up by the Wall Street Journal but not in the way the author thought it meant.

The data says the economy is doing great; the markets say it could be headed for a recession.

At turning points the data is always too late by definition which means that some sort of judgement call is required. Central banks have about a 0% success rate in predicting recessions.

Comment

There is a fair bit to consider in the latest central banking moves but the major point is one of timing. Monetary policy is supposed to lead events and not to lag them which is why “data dependency” is not only flawed it is illogical. To be fair to the US Federal Reserve it has at least tried to get ahead of events whereas the Riksbank has not.

Meanwhile there is a country with a central bank meeting today which has just had some strong economic news.

The quantity bought in November 2018 when compared with October 2018 increased by 1.4%, with a strong monthly growth of 5.3% in household goods stores….The strongest growth can be seen in comparison with the same period a year earlier where the amount spent increased by 5.0% and the quantity bought increased by 3.6%.

Is anybody expecting Mark Carney and the Bankof England to have raised interest-rates in response to the strong retail sales data? I am using the past tense as the vote was last night.

Number Crunching

So, Deutsche Bank’s entire market cap is now just €2bn higher than its combined profit for 2006-2007.

It has been a while since we have gone Dutch and taken a look at the economic situation in the Netherlands. The first point to note is that it has followed the Euro area trend for lower growth.

According to the first estimate conducted by Statistics Netherlands (CBS) based on currently available data, gross domestic product (GDP) expanded by 0.2 percent in Q3 2018 relative to the previous quarter. The growth rate was the lowest in over two years. Growth in Q3 was due to increased household consumption and international trade.

There is a difference here in that it managed to find some growth in trade as opposed to Germany where a decline pushed it into contraction in the latest quarter. But in essence we are seeing yet again a consequence of the slow down of the Euro area monetary data feeding into economic activity. In the case of the Netherlands this came from a high base.

According to the first estimate, GDP was 2.4 percent up on the same quarter in 2017. Growth was mainly due to higher consumption. Investments in fixed assets and international trade also contributed, but less than in the previous quarter.

So we see that annual growth remains strong for now at least and that there has been a consumption boom.

In Q3, consumers spent over 2 per cent more than in Q3 one year previously. For 18 quarters in a row, consumer spending has shown a year-on-year increase.

A driver of this will be the strong employment situation.

Between August and October 2018, the number of people aged 15 to 74 in paid employment grew by an average of 20 thousand per month. Total employment stood at more than 8.8 million in October. Unemployment declined by an average of 4 thousand per month to 337 thousand.

Statistics Netherlands is harsh relative to others as it counts up to the age 75 got these purposes. Also it looks like the underemployment situation has improved too.

The total unused labour potential in Q3 2018 comprised nearly 1.1 million people. This was almost 1.3 million one year previously.

This is not leading to a trade problem though although part of the good performance is not in line with the times.

Statistics Netherlands (CBS) reports that the total volume of goods exports grew by 5.1 percent in October relative to October 2017. Relative growth was higher than in September. In October 2018, exports of transport equipment, metal products, machinery and appliances increased most notably. The volume of imports was 4.4 percent up on October 2017.

The Netherlands must be the only place where transport equipment sales are up. Also not so many have trade volumes up right now. In terms of context we do need to note this though.

On balance, the Netherlands enjoys a goods trade surplus, i.e. exports exceeding imports. Re-exports play a significant role in the Dutch goods trade surplus. In 2016, approximately 36 percent of the surplus was caused by re-exports.

Looking Ahead

Yesterday the central bank the De Nederlandsche Bank (DNB) gave us its view.

While the economic boom is sustained, growth of the Dutch economy will slightly decelerate in the next few years. Growth in gross domestic product (GDP) is estimated at 2.5% for 2018, followed by 1.7% in 2019 and 2020.

Unlike in some Euro area countries that does qualify as a boom in these times. If we look back we see that since the 99.9 of the second quarter of 2013 GDP has risen to 112.2 where 2010=100. That also tells us that the Netherlands was pulled back by the Euro area crisis which preceded that.

The next bit is rather more uncomfortable, however.

Despite slightly lower growth figures, the Dutch economy will be running at full steam in the years ahead, with actual output exceeding its potential. Unemployment is set to remain very low. Households should benefit from a pick-up in wage growth, which will boost real disposable income in 2019 and 2020

It looks good but how is 1.7% growth “full steam” compared to this?

GDP growth peaked at 3.0% in 2017 and is estimated at 2.5% for 2018.

This is because central banks like to travel in a pack as we observe what is now their way of spinning their rather depressing view of our future.

It will recede to 1.7% in both projection years 2019 and 2020, approximating potential growth of around 1.6%, with the output gap widening from 0.3% in 2017 to 1.0% in 2018.

Sadly they never get pressed on this. After all they have interfered in so much of economic life with in this instance enormous QE and negative interest-rates but they seem to get a free pass on the issue of economic growth now being regarded as being likely to be lower than before. Even when Mario Draghi opens both the door and the window.

but certainly especially in some parts of this period of time, QE has been the only driver of this recovery.

Also even the slower growth future relies on something which has to now be in doubt.

In 2018, gross remuneration per employee in the business sector is set to regain momentum, growing by 2.3%. Our projections show that it will be 3.0% in 2019 and 3.8% in 2020, assuming the usual wage-price dynamics.

The emphasis was mine to highlight that no matter how often the output gap theory fails it comes back to life. No silver bullet seems to be pure enough to kill this vampire! Whereas if we continue to see an economic slow down then after a lag wage growth will presumably slow too rather than continue to pick-up. Although it would appear that should something like that happen an excuse is in place, what is Dutch for Johnny Foreigner please?

An alternative scenario featuring a downward correction in international financial markets sees the growth rate for emerging market economies – including China – deteriorate. This also affects the Dutch economy due to increasing risk aversion, slowing global growth and reduced confidence. Compared with our projections, this could send annual GDP growth 0.4 percentage points lower on average in 2019-2020.

House Prices

This will be on the video screens at the DNB and ECB Christmas parties,

In September 2018, prices of owner-occupied dwellings (excluding new constructions) were on average 9.3 percent higher than in the same month last year. The price increase was the same as in the previous month. This is according to the price index of owner-occupied dwellings, a joint publication by Statistics Netherlands (CBS) and the Land Registry Office (Kadaster).

This will raise a cheer and then boos.

House prices reached a record high in August 2008 and subsequently started to decline, reaching a low in June 2013.

Before the party really gets going again!

In May 2018, the price index of owner-occupied dwellings exceeded the record level of August 2008 for the first time; prices continued to rise and are at their highest level since the start of this price index in 1995. Compared to the low in June 2013, house prices were up by over 32 percent on average in September 2018.

Or in twitter terms 🍾👍

Comment

The economic going has been good in the Netherlands. Well unless you are a first-time house buyer watching prices accelerate away from you. But now even it must be wondering what 2019 will bring and how much of an economic slow down it will see? Just a continuation of the 0.2% quarterly economic growth just seen will tighten things up a bit and that happens with negative interest-rates and a ten-year bond yield of only 0.4%.

Yet some continue to churn out the line that interest-rates are going to be raised in the Euro area. I just do not get it.

Tomorrow the European Central Bank meets for what has become a crucial policy meeting. There is a lot for it to discuss on the economic front and let us open with an element of deja vu.

Bank Of Spain Governor De Cos: No Signs Of New Property Bubble In Spain – RTRS ( @LiveSquawk )

It is hard not to think of the “Never believe anything until it is officially denied” by the apocryphal prime minister Jim Hacker at this point. He is responding to this covered by El Pais yesterday.

The International Monetary Fund (IMF) is calling on Spain to monitor the price of real estate following a rebound of the property market after years of crisis. After analyzing late 2017 statistics, the global agency has detected early signs of “a slight overvaluation,” although it stressed that there is still nothing like a new housing bubble in Spain.

Here is a reminder of the state of play which is that Spain is a nation of home owners.

The IMF finds that house prices increased by around 15% between 2014 and 2017, but that sales are being driven by existing housing stock rather than new housing. Another change from pre-crisis days is that the home ownership rate has dropped from 80% to 77% as people increasingly turn to the rental market.

Let us bring the numbers up to date via INE from the end of last week.

The annual variation of the Housing Price Index (IPV) in the third quarter of 2018 increases four tenths and stands at 7.2%……The quarterly variation of the general IPV in the third quarter of 2018 is 2.2%.

The IMF seems to have missed that the pace of house price growth has picked up in Spain. Not only the 2.2% quarterly rise but the fact that the overall index set at 100 in 2015 is now at 120.5. Returning to the role of the ECB a typical mortgage rate (over 3 years) is 1.93%.

Ireland

Last time around a housing boom and later bust in Spain was accompanied by one in Ireland so let us check in on yesterday’s official update.

Residential property prices increased by 8.4% nationally in the year to October. This compares with an increase of 8.5% in the year to September and an increase of 11.7% in the twelve months to October 2017.

As you can see the heat is on again and is heading towards levels which caused so much trouble last time around.

Overall, the national index is 17.6% lower than its highest level in 2007. Dublin residential property prices are 20.1% lower than their February 2007 peak, while residential property prices in the Rest of Ireland are 22.7% lower than their May 2007 peak.

Also they have got there rather quickly.

Property prices nationally have increased by 83.8% from their trough in early 2013. Dublin residential property prices have risen 98.0% from their February 2012 low, whilst residential property prices in the Rest of Ireland are 77.9% higher than at the trough, which was in May 2013.

Now that it has got the central banking holy grail of higher house prices the ECB seems to have, for some reason got cold feet about putting them in the consumer inflation index.

The ECB concludes that the integration of the OOH price index would deteriorate the current
frequency and timeliness of the HICP, and would introduce an asset element. Against this
background, it takes the view that the OOH price index is in practice not suitable for
integration into the official HICP.

It has turned into a classic bureaucratic move where you promise something have a committee formed to do it which concludes so sadly that it will not do it. The reasons stated were known all along.

Economic growth

Whilst house price developments will put a smile on the faces of Governing Council members other economic developments may wipe that smile away. One possible bright spot has gone a bit dark. From France24.

The Bank of France said the Eurozone’s second-biggest economy would eke out growth of only 0.2% in the three months to December, down from 0.4% in a previous estimate and from that rate in the third quarter.

“Services activity has slowed under the impact of the movement. Transport, the restaurant and auto repair sectors have gone backwards,” the bank said in its latest company survey.

The forecast is well short of the 0.8% that would be needed to meet the government’s 2018 growth target of 1.7%.

That was reinforced by the production and manufacturing data for October which was up on the month but 0.1% lower than a year ago. The growth shortfall will only make the next French problem worse. From Reuters.

Macron announced wage increases for the poorest workers and a tax cut for most pensioners on Monday to defuse discontent, leaving his government scrambling to come up with extra budget savings or risk blowing through the EU’s 3 percent of GDP limit.

That is especially awkward considering how vocal the French government had been about the Italian budget plans which in percentage terms was set to be a fair bit smaller.

Italy

The perennial under performer in economic terms seems to be in yet another “girlfriend in a coma” style phrase. From the latest monthly economic report.

In Italy, the GDP decreased marginally in the third quarter due to a contraction in both gross fixed investments and private consumption. On the contrary, the net exports contributed positively to growth.

The employment stabilized on past months levels recording a re-composition, which favored full time employees. Unemployment rate increased and was complemented by a reduction in inactive persons.

Italian inflation continued to be lower than the Eurozone average but the gap is closing.
In November, both the consumer confidence and the composite indicators decreased. The leading indicator stabilized on past months minimum values confirming the business cycle weakness.

There is a genuine danger of what some of the media have decided to call a technical recession. I get the point about it being within the margin of error and applaud their sudden conversion to this cause. But missing from this is the fact that this is an ongoing depression in Italy which shows not only no sign of ending but may be getting worse.

Comment

This will be a meeting of two halves. The awkward part is that after all the extraordinary monetary action involving negative interest-rates, QE and credit easing the Euro area economy has slowed from a quarterly growth rate of 0.7% to 0.2%. If we were not where we are the ECB would be discussing a stimulus programme. Except of course the plan is to announce the end to monthly QE bond purchases. Some places are suggesting a delay to future interest-rate increases as they catch up with my long-running view that Mario Draghi has no intention of raising them on his watch.

The second half will be the one emphasised which is that the ECB has hit its inflation target.

Euro area annual inflation is expected to be 2.0% in November 2018, down from 2.2% in October 2018, according to a flash estimate from Eurostat.

Okay not the 1.97% level defined by the previous President Jean-Claude Trichet but close enough. I wonder if any of the press corps will have the wit to ask about the U-Turn on including house prices in the inflation measure and whether that is because monetary policy can inflate house prices?

We are in the season for a raft of UK economic data although at the moment markets are being driven by Brexit developments, or rather the apparent lack of them. One consequence of this was a nearly 2 cent fall versus the US Dollar to below US $1.26 and around a 1 cent fall versus the Euro to below 1.11. I await the exact numbers on the change in the trade weighted or effective exchange rate index but the move was such that we saw something that under the old rule of thumb was equivalent to a 0.25% Bank Rate cut. That reminded me of this from early April ( no not the 1st…) 2016 in City AM.

Britain’s foreign currency reserves reached a new record high last month, passing $100bn (£70.5bn) for the first time, as the UK looks to be building a buffer to defend the pound against the prospect of a currency crisis ahead of the EU referendum.

Another $4.5bn in reserves was acquired in March, taking the total amount held to $104.2bn and fuelling speculation that the Treasury and Threadneedle Street are getting their ducks in a row to deal with wild swings in the value of sterling around the time of the referendum.

Actually the Bank of England has been building up its foreign exchange reserves in the credit crunch era and as of the end of October they amounted to US $115.8 billion as opposed as opposed to dips towards US $35 billion in 2009. So as the UK Pound £ has fallen we see that our own central bank has been on the other side of the ledger with a particular acceleration in 2015. I will leave readers to their own thoughts as to whether that has been sensible management or has weighed on the UK Pound £ or of course both?!

But my fundamental point is to enquire as to under what circumstances would the Bank of England intervene to support the currency? This is what it is officially for.

The EEA was established in 1932 to provide a fund which could be used for “checking undue fluctuations in the exchange value of sterling”.

This, in my opinion could not contrast much more with the UK Gilt market which has surged due to expectations, or fears if you prefer of more QE bond buying from the Bank of England. It does not get reported much but the UK ten-year Gilt now yields a mere 1.24%.

Labour Market

Productivity

Yesterday our official statistician’s produced some research which backed up a long-running theme of my work.

Productivity gap narrows

As a reminder I wrote this back on January 18th on the subject.

I have regularly argued that it is very likely we have miss measured productivity and therefore the crisis will to some extent fade away……..If we go back to the peak headlines where for example the Bank of England argued we were some 19% below where we would have been projecting pre crisis trends we are left wondering how much is due to miss measurement?

Or in musical terms we need some Imagination

Could it be that it’s just an illusion
Putting me back in all this confusion
Could it be that it’s just an illusion now?

That was partly in response to some new work by Diane Coyle suggesting that the telecoms sector had in fact seen more growth than the official statistics recorded. Regular readers will not be surprised to learn that the official response was a somewhat woeful tweaking of the numbers to give basically the same answer as before,

But now there has been a new development.

Historically each country has used the best data available to it, but the OECD’s working paper shows that, when using a more consistent method to compare total hours worked, the UK’s labour productivity improves significantly relative to other countries. For example, the UK’s productivity gap with the US would reduce by about 8 percentage points from 24% to 16% when adopting the simple component method approach.

I do not know about you but when I compare numbers I always look to do them on as “like for like” basis as possible and find it not a little breathtaking that this has not been done before. But the good news is that it has now.

Not everyone’s numbers improve as for example Greece sadly gains little. Oh and if I was looking at these numbers I would be thinking of words like “offshoring” and phrases like “Gross National Product” about the stellar performances of Luxembourg and Ireland.

A clear signal was of course given earlier this year by the Office of Budget Responsibility going bearish on productivity trends.

Good news on wages

Here we go.

Latest estimates show that average weekly earnings for employees in Great Britain in nominal terms (that is, not adjusted for price inflation) increased by 3.3%, both excluding and including bonuses, compared with a year earlier.

As we welcome this let us take the rare opportunity to congratulate the Bank of England on beginning to look correct. After all this has come after many years of pain for it. The official view tells us this about real wages.

Latest estimates show that average weekly earnings for employees in Great Britain in real terms (that is, adjusted for price inflation) increased by 1.0% excluding bonuses, and by 1.1% including bonuses, compared with a year earlier.

The catch is that the number above relies on an inflation number called CPIH which is dragged lower by the use of Imputed Rents. If we switch to the previous measure CPI real wage growth falls to 0.7% or so as the depressing influence of Imputed Rents falls out of the data. If we use RPI then rather than real wage growth we find that it is at least no longer falling. Can anybody think why the establishment does not like the RPI measure? Apart from when it is used in their own defined benefit pensions I mean.

The numbers for October on its own provided some further cheer as at 3.9% it even exceeded RPI by 0.6% as the numbers were pulled higher by the service sector (4.2%).

Employment continues to grow as well.

There were an estimated 32.48 million people in work, 79,000 more than for May to July 2018 and 396,000 more than for a year earlier.

Not so good was the rise in unemployment for men of 27,000 and I am putting it like that as female unemployment fell by 7,000. It was due to a shift out of the inactivity sector so we will have to wait to see what it really means.

Comment

There is a lot to consider right now but let us remind ourselves that producers of official statistics need to consume a slice of humble pie every now and then. Yesterday saw two clear examples of this with the large revision to UK trade especially ( surprise,suprise ) for the services sector and then a solid chunk of the productivity gap faded away. Or rather the perceived productivity gap. The latter had been on my mind Sunday evening because as I went for a run around Battersea Park after 8 pm and noted the shop selling Christmas trees was still open. Great for consumers but bad for one way at least of measuring productivity.

But left me leave you with the question of the day. When would Mark Carney and the Bank of England actually use our currency reserves?

One of the supposed constants of the credit crunch era has been the economic performance of Germany. Earlier this week saw a type of confirmation of past trends as the European Central Bank or ECB updated its capital key, which is calculated on the basis show below.

The shares of the NCBs in the ECB’s capital are weighted according to the share of the respective Member States in the total population and gross domestic product of the European Union (EU), in equal measure.

Few will be surprised to read that in Euro area terms ( other European Union members are ECB shareholders with the Bank of England at 14.33%) the share of Germany has risen for 25.6% to 26.4%. That poses an issue for any future ECB QE especially as the Italian share has declined. But a little food for thought is provided by the fact that the Bank of England share went up proportionately more.

The economic outlook

As the latest monthly economic report from the Bundesbank points out the situation is not starting from its usual strength.

Economic output in Germany dipped slightly in
the third quarter of 2018. According to the
Federal Statistical Office’s flash estimate, real
gross domestic product (GDP) contracted by
0.2% in seasonal and calendar-adjusted terms
as compared to the previous quarter.

That has tended to be swept under the carpet by the media partly because of this sort of analysis.

This decline was mainly caused by a strong temporary
one-off effect in the automotive sector.

Central banks always tell you a decline is temporary until they are forced not too and in this instance we see two bits at this particular cherry as “temporary” finds “one-off” added to it. But the detail begs a question.

Major problems in connection with the introduction
of a new EU-wide standard for measuring exhaust emissions led to significant production
stoppages and a steep drop in motor vehicle
exports.

Fair enough in itself but we know from our past analysis that production boomed ahead of this so we are counting the down but omitting the up. Whereas next we got something I had been suggesting was on the cards.

At the same time, private consumption was temporarily absent as an important force driving the economy.

This reminds me of my analysis from October 12th.

Regular readers will be aware of the way that money supply growth has been fading in the Euro area over the past year or so, and thus will not be surprised to see official forecasts of a boom if not fading to dust being more sanguine.

The official view blames the automotive sector but if we take the estimate of that below we are left with economic growth of a mere 0.1%.

IHS Markit estimates that the autos drag on Germany was around -0.3 ppts on GDP in Q3

Apparently that is a boom according to the Bundesbank as its view is that the economy marches on.

Indeed we might permit ourselves a wry smile as the usual consensus that good weather boosts an economy gets dropped like a hot potato.

as well as the exceptionally hot, dry
weather during the summer months.

No ice-creams or suntan oil apparently.

What about now?

The official view is of a powerful rebound this quarter but the Markit PMI survey seems to be struggling to find that.

If anything, the underlying growth trajectory for the industry remains downward: German manufacturers reported a near stagnation of output in November, the sharpest reduction in total new orders for four years and a fall in exports not seen since mid-2013. Moreover, Czech goods producers, who are sensitive to developments in the autos sector, again commented on major disruption,

If we look wider we see this.

The Composite Output Index slipped to a near four-year low of 52.3 in November, down from 53.4 in October.

Moving to this morning’s official data we were told this.

In October 2018, production in industry was down by 0.5% from the previous month on a price, seasonally and calendar adjusted basis according to provisional data of the Federal Statistical Office (Destatis).

It was 1.6% higher than a year ago on the other side of the coin but Bundesbank hopes of a surge in consumption do not seem to be shared by producers.

The production of consumer goods showed a decrease of 3.2%.

Yesterday’s manufacturing orders posed their own questions.

+0.3% on the previous month (price, seasonally and calendar adjusted)
-2.7% on the same month a year earlier (price and calendar adjusted)

Deutsche Bank

The vultures are circling again and here is how the Wall Street Journal summed it up yesterday.

Deutsche Bank shares were down about 4% in afternoon trading Thursday in Frankfurt, roughly in line with European banks amid broader market declines. Deutsche Bank shares have fallen 51% this year to all-time lows below €8 ($9.08).

As I type this it has failed to benefit much from today’s equity market bounce and is at 7.73 Euros. Perhaps because investors are worried that if it has not done well out of “the economic boom” then prospects during any slow down look decidedly dodgy. Also perhaps buyers are too busy laughing at the unintentional comedy here.

Deutsche Bank on Thursday and last week defended senior executives. Improving compliance and money-laundering controls “has been a real emphasis of current management,” and the bank has made “enormous investments” in fighting financial crime, said Mr. von Moltke, who joined the bank in 2017, in the CNBC interview.

Could it do any worse? The numbers are something of a riposte also to those like Kenneth Rogoff who blame cash and Bitcoin for financial crime.

Deutsche Bank processed an additional €31bn of questionable funds for Danske Bank than previously thought – that takes the total amount of money processed by the German lender for Danske’s tiny Estonian branch to €163bn ( Financial Times).

That compares to the present market value of 16 billion Euros for its shares. That poses more than a few questions for such a large bank and whilst banking sectors in general have been under pressure Deutsche Bank has been especially so. Personally I do not seem how merging it with Commerzbank would improve matters apart from putting a smoke screen over the figures for a year or two. One thing without doubt is that it would make the too big to fail issue even worse.

Comment

If we look at the broad sweep Germany has responded to the Euro area monetary slow down as we would have expected. What is less clear is what happens next? This quarter has not so far show the bounce back you might expect except in one area. The positive area is the labour market where employment is 1.2% higher than a year ago and wages have risen with some estimates around 3%. So the second half of 2018 seems set to be a relatively weak one.

One area which must be an issue is the role of the banks because as they, and Deutsche Bank especially, get weaker how can they support the economy via lending to businesses? At least with the fiscal position strong ( running a surplus) Germany has ammunition for further bailouts.

Moving back to the ECB I did say I would return to the capital key change. It means that under any future QE programme it would buy relatively more German bunds except with its bond yields so low with many negative it does not need it. Also should the slow down persist there is the issue of it being despite monetary policy being so easy.

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About the author

I am a freelance economist who studied at the London School of Economics. My speciality was (and still is) monetary economics. I worked in the City of London for several investment banks and then on my own account over a period of 15 years. After initially working in the government bond department at Phillips and Drew Ltd. I moved on into the derivatives arena with options of all types being a speciality. I never lost my specialisation in UK interest rates and also traded as a local on the London International Financial Futures Exchange where I mostly traded futures and options on future and present UK interest rates. So with my specialisations of monetary economics and konwledge of derivatives I have plenty of expertise to deploy on the financial and economic crisis which has unfolded in recent years.

I have also worked in Tokyo Japan again in the derivatives sphere and would particularly recommend Japanese food with a pork tonkatsu box lunch being one of my favourites. My name is Shaun Richards and as well as writing economics reports and analysis I also give speeches and lectures.Should one or all of these be of interest then please contact me via the contact details on this website.

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